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Bankruptcy Q&A - Stripping a junior lien in a chapter 13

Stripping a junior lien in a chapter 13

January 29, 2015

STRIPPING A JUNIOR MORTGAGE

Sometimes a client comes in for a bankruptcy consultation and during the consultation I find out that part of the reason they have a hard time making ends meet is they have a second mortgage on their house. I then explain to them that if they file a chapter 13 bankruptcy, they can strip the 2nd mortgage or Home Equity Line of credit (HELOC)off their house. Today I would like to talk about stripping a junior mortgage off your house.

So let us ask a couple of questions:

Can a junior mortgage be stripped?

How can it be stripped?

For the first question, we need to look at the BACPA. 11 USC 506 (a) determines whether a lien has a secured value on the real estate. Basically it works this way. If the value of the house is appraised at less than the value of the first mortgage, the any subsequent lien on the house is unsecured. So then we need to look at 11 USC 1322 (b)(2). This section prohibits the modification of a secured lien on a house that is the debtor's principal residence. But it does permit modification of an unsecured claim on a house. Taking 11 USC 506(a) and 11 USC 1322(b)(2) together, this has been interpreted to mean that that subsequent lien which does not have any secured value can be stripped off the house. This was ruled on by the 6th Circuit in In re Lane, 280 F.3d 663(6th Cir. 2002).

It is also interesting to note that 11USC 1322 (b)(2) only prohibits the modification of a secured lien on a principal residence. This means if you own a rental property which is not your principal residence, then you can modify the mortgage by cramming it down to the value of the house.

So now since we know why the junior mortgages and liens can be stripped, we need to know the procedure for doing this.

If you are filing a Chapter 13 in the Akron Bankruptcy Court, you need to do it by filing an adversary proceeding. If you are filing a Chapter 13 in the Canton Bankruptcy Court, you can do it by motion and order. The Canton Bankruptcy however requires the Trustee to get an appraisal of the house. In Akron, you can use the Summit County Fiscal Office Appraisal.

The Courts in the past have also stated that the Debtor(s) must be eligible for a discharge in the Chapter 13 until recently.

In re Cain, (Sixth Circuit B.A.P.)( Case No. 13-8045)(July 2014) ruled that a wholly unsecured status of a junior mortgage can be determinative on whether a junior mortgage can be stripped rather than basing it on eligibility for discharge. This would usually come up in a Chapter 20 case. This means the debtor originally filed a Chapter 7 but then turns around and files a chapter 13 before being eligible for the discharge in a chapter 13.

If you are looking for help in lien stripping in the Akron, Canton, Wooster, New Philadelphia area, you need to hire an experienced bankruptcy attorney in Bates and Hausen, LLC. Feel free to contact us in guiding you through this process.

Submitted on 1/29/2015

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